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Capital Asset Pricing Model (CAPM): Kellogg common equity

1. Use the Capital Asset Pricing Model (CAPM) to find the expected return on Kellogg common equity. Use monthly price data for the last ten years (ending June 2004). The following steps will guide you through this problem.

A. Using the FRED database, (http://research.stlouisfed.org/fred2/) calculate the average return on 10-year treasury constant maturity rate bonds. Use this as your estimate of the risk free rate.

B. Find the average return for the S&P 500 as an estimate of the return on the market. (One source for the past prices of stocks and levels of indices is MSN Money, (http://moneycentral.msn.com/home.asp) where the symbol for the S&P 500 index is '$INX' and for Kellogg is 'K').

C. Using the regression function in Excel, find the beta for Kellogg using the S&P 500 as a proxy for the market.

D. Using the data and results from the previous questions, find the expected return on Kellogg common equity according to the Capital Asset Pricing Model (CAPM).

Please submit as an attached Excel file

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1) The calculations for beta and average return is on the sheet " ...

Solution Summary

The solution
1) Using the FRED database, calculate the average return on 10-year treasury constant maturity rate bonds. This is an estimate of the risk free rate.
2) Finds the average return for the S&P 500 as an estimate of the return on the market.
3) Using the regression function in Excel, finds the beta for Kellogg using the S&P 500 as a proxy for the market.
and
4) Using the data and results obtained above, finds the expected return on common equity according to the Capital Asset Pricing Model (CAPM).

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